Reform agenda puts China's economic superagency under scrutiny

SHANGHAI, July 16 Mon Jul 15, 2013 5:02pm EDT

SHANGHAI, July 16 (Reuters) - Behind China's two investigations into irregular pricing of infant formula and pharmaceuticals announced this month is one powerful institution and its struggle for relevance as Beijing attempts a transition to a more consumption-led economy.

The investigations have entangled big foreign companies including Danone SA, Nestle SA and GlaxoSmithKline Plc. But some analysts say there may be something deeper at work - jockeying over the direction of policy in the world's second largest economy in the years ahead.

The National Development and Reform Commission (NDRC), Beijing's economic superagency, sets policy for strategic industries, approves big investments, mergers and acquisitions, and has the authority to influence prices for everything from liquor to gasoline.

Its powers are so sweeping that it is often called the "little State Council".

But in recent months, as President Xi Jinping and Premier Li Keqiang have begun an attempt to steer China's economy away from its reliance on state-led investment towards a more consumer-focused model, academics and even senior officials have begun to publicly cast doubt on the NDRC's role.

While the NDRC has always had a price-setting role, its decision to launch high profile predatory pricing probes into infant formula and drugs now could be a bid by the commission to prove its usefulness as a regulator.

"On a fundamental level, the NDRC is scrambling to show that it has something to contribute," says Barry Naughton, professor at the University of California, San Diego, and a specialist in China's economy.

SHIFTING PRIORITIES

That the main economic policy body in the fastest-growing major economy over the past decade might feel the need to shore up its position says much about the debate raging among Chinese policymakers. In key areas, the new leaders are trying to shift China's priorities in ways that represent a challenge to the NDRC's traditional dominance.

Evidence that dominance could be under threat includes the fact that Premier Li made the reduction of bureaucratic approvals - one of the NDRC's main roles - a key plank of his reform plan announced in March.

In May, Li also rejected a 40 trillion yuan ($6.5 trillion) urbanisation plan that the NDRC had proposed, sources familiar with the matter told Reuters, although the commission denies this.

Xi and Li remain committed to urbanisation, but the push now is "less about building stuff", says Arthur Kroeber, managing director of GaveKal Dragonomics Research, and more about helping migrants live "more fully-fledged urban lives".

Reducing bureaucratic red tape - such as the NDRC approvals process - is another way the new administration would like to shrink the role of the state in the economy.

There are also concerns among academics about the NDRC as an institution. Founded in 1952 as the State Planning Commission, it is deeply rooted in China's command economy past, even as it crafts policies for its mostly capitalist present.

Part of the debate is about whether, through its investment approval function, the NDRC is allocating resources as efficiently as possible, says Shi Lei, professor of economics at Fudan University. Overcapacity plagues many industries in China.

With so much power concentrated in one institution, corruption is another worry - Liu Tienan, former NDRC vice chairman, is under investigation over allegations he took bribes to help a businessman defraud banks.

REGULATORY ROLE

The NDRC is no stranger to controversy. It has faced challenges to its power before and has found ways to survive and even increase its influence.

Indeed, this month's drugs and formula investigations could well be a sign that the NDRC is adapting to the new mood in Beijing by strengthening its role as a regulator.

Especially since the 2011 introduction of regulations governing its role in implementing the 2008 Anti-Monopoly Law, the NDRC has been stepping up its investigations into pricing practices.

In March, it imposed a 449 million yuan fine on two domestic liquor firms for setting minimum resale prices and a 10 million yuan fine on eight real estate companies for misleading customers and violating pricing regulations.

In January, it found six foreign LCD manufacturers guilty of price fixing and fined them 353 million yuan.

Few sectors pack the symbolic punch of infant formula, both for Chinese consumers and the government. Since 2008, when melamine in infant formula killed six babies and sickened 300,000 others, the infant formula industry has epitomized the trade-off between rapid economic growth and health and safety.

Driving down prices also supports Beijing's efforts to shift the economy away from a reliance on exports and investment toward a greater dependence on consumption. Drugs and infant formula are both commonly perceived as too expensive.

"Every time price reductions are made, it's mainly a public relations exercise," said Zhou Zhang, an analyst at China Merchant Securities. "The NDRC trumpets how big reductions will be, but when it comes down to it, prices only fall a bit. The NDRC's main consideration is public relations."

The NDRC did not respond to a request for comment. One person with knowledge of the NDRC investigations said that they were being conducted at an unusually rapid pace.

The infant formula investigation also appears to cover not collusion among companies, but how the retail prices for these products are set - an issue where China's laws differ from those in other countries, including the United States.

All of the infant formula companies targeted have reduced prices in China since the NDRC announced its investigation.

That might be good for consumers in the short term, but Scott Kennedy, director of the Research Center for Chinese Politics & Business at Indiana University, questioned the NDRC's credentials as a consumer watchdog, given its central role in China's export- and investment-led expansion of the past two decades.

"This is an economy built by, for and of industry," he said.

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